Question

M5-7 (Algo) Estimating Cost Behavior (LO 5-2,5-3] Castle Inc. has the following information: Month Cost A January February Amount $ 56,000 $ 78,400 Units 44,800 89,600 Month Cost B January February Amount $ 32,000 $ 64,000 Units 64,000 128,000 Cost C Month January February Amount $ 28,000 $ 28,000 Units 40,000 80,000 Indicate whether these costs are variable, fixed, or mixed. Cost A Cost B Cost C

Answer 1

According to variability or behaviour costs are classified into three group viz., fixed,
variable and semi-variable.

Cost A is semi-variable cost. Semi-variable costs– These costs contain both fixed and variable components and are thus partly affected by fluctuations in the level of activity. Examples of semi variable costs are telephone bills, gas and electricity etc.

Cost B is Variable cost– These costs tend to vary with the volume of activity. Any increase in the activity results in an increase in the variable cost and viceversa. For example, cost of direct labour, etc.

Per unit cost of variable costs will be same at all levels of production. In the given case, we can see that per unit cost of production for both of the months are same,

$32,000/ $64,000 = $0.50

$64,000/ $128,000 = $0.50

Cost C is Fixed cost– These are the costs which are incurred for a period, and which, within certain output and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They do not tend to increase or decrease with the changes in output. For example, rent, insurance of factory building etc., remain the same for different levels of
production.

In the given case we can see that Cost C is same for both of the months at different units of production.